Real Estate Investment Trust or REIT is a company that owns, and in many cases, operates income-producing real estate such as apartments, shopping centers, offices, hotels and warehouses. Some REITs also engage in financing real estate. The shares of many REITs are publicly traded but this is not a requirement for qualification as a REIT.
To qualify as a REIT, a company must distribute at least 90 percent of its taxable income to its shareholders annually. A REIT is allowed to deduct dividends paid to its shareholders from its corporate taxable income. Therefore, most REITs distribute at least 100 percent of their taxable income to their shareholders and thus owe no federal corporate tax. Taxes are paid by shareholders on the dividends they receive and any capital gains. Most states honor this federal treatment and also do not require REITs to pay state income tax. Like other businesses, but unlike partnerships, a REIT cannot pass any tax losses through to its investors.